The vital role of financial institutions in sustainable finance

Our FIC experts unpack the latest developments in the sector after The Banker names BNP Paribas 'Investment Bank of the Year for Sustainable FIG financing'.

BNP Paribas has been named ‘Investment Bank of the Year for Sustainable FIG financing’ by The Banker (an FT publication) in their 2020 Investment Banking Awards. We speak to Sandrine Ferdane, BNP Paribas’ new Global Head of Financial Institutions Coverage (FIC) and Alexandra Basirov, Global Head of Sustainable Finance, Financial Institutions Coverage to uncover how our teams are supporting financial institutions to embed sustainable finance into their business, and discuss the latest trends influencing the sector.

This year you were appointed Global Head of Financial Institutions Coverage (FIC) – what were your first impressions of the engagement of the FIC sector on sustainability?

Sandrine Ferdane (SF): FIC at BNP Paribas encompasses the global institutional client base including asset managers, banks, insurance companies, private equity funds, hedge funds, pension funds and official institutions – which include central banks, multilateral development banks, sovereign wealth funds and the sovereigns. 

During the conversations I have with clients, it is clear that every sector is part of the sustainable development journey. They recognise their role and responsibility in society, and are increasingly seeing this agenda drive financial returns. The regulatory environment in some jurisdictions is also a major factor. The sector is rapidly increasing its knowledge around climate risk, whilst harnessing opportunities in the transition to a more inclusive and sustainable economy. We expect the momentum to build further and this is a key pillar of our FIC strategy. 

How does this sustainability momentum translate into the strategy of our financial institutions clients, and what does The Banker award mean to you and the FIC teams?

Alexandra Basirov (AB): By choosing how to target their financing, what to invest in, and in which solutions they develop, financial institutions can play a leading role in accelerating the necessary transition towards a sustainable economy. The bank supports financial institutions clients to fuse positive impact and positive performance by mobilising the full capabilities of our entire BNP Paribas Group, and this award is great recognition of the commitment and dedication of our teams to support our clients in embedding sustainability into their business.

“The bank supports financial institutions clients to fuse positive impact and positive performance by mobilising the full capabilities of our entire BNP Paribas Group.”

As Sandrine mentioned, the momentum is quite extraordinary – but there remains a lot to be done to hit the goals of the Paris Agreement and the UN SDGs (Sustainable Development Goals). We look forward to building on this with our clients, and we thank them for their continued trust.

Are there any client types where you notice the FIC sector is pioneering sustainable finance?

SF: As mentioned, we recognise all clients are on this journey. Undoubtedly some segments have seen a significant mobilisation in embedding sustainable finance into their strategy – for example, the private equity space. The bank has supported several notable sustainable finance transactions for private equity clients including:

  • EQT – BNP Paribas acted as Sustainability Coordinator on the largest-ever ESG-linked Subscription Credit Facility for EQT, a global investment organisation. The €2.3 billion facility has an upper limit of around €5 billion and includes a pricing mechanism designed to incentivise the performance of portfolio companies in the areas of gender equality on boards, renewable energy transition, and stronger sustainability governance.
  • Eurazeo – in January 2020, global investment company Eurazeo contracted the first ever syndicated sustainability-linked loan (SLL) for a private equity firm, and BNP Paribas acted as sole Sustainability Coordinator. This €1.5bn revolver loan refinances a €1bn facility, with the mechanism of the facility mixing two types of key performance indicators: first, the management company (Eurazeo SA) committed to becoming carbon neutral, and second, the loan is tied to the strict sustainability governance for Eurazeo’s portfolio of companies throughout the investment cycle.
Sandrine mentions private equity, but what about the role of banks and how they themselves are adapting?

AB: Banks have a critical role to play in financing the transition, and there are now over 185 banks signed up to the UN’s Principles for Responsible Banking (PRB). The Principles provide a framework for a sustainable banking system and help the industry demonstrate how it makes a positive contribution to society using the UN Sustainable Development Goals and the Paris agreement as guiding principles. At BNP Paribas, the breadth and depth of products and services is extensive and continues to expand, allowing us to engage on key and evolving developments on this agenda, such as biodiversity loss, with our client base. Banks can also issue sustainable (green, blue & social) bonds and hybrid capital to finance their lending portfolio and support the development of the market by moving such instruments down the capital spectrum through issuing green subordinated debt all the way to Additional Tier 1. It is also through their wealth management and private banking arms that banks have the ability to engage their clients in sustainable investing, and here BNP Paribas leverages its asset management and global markets structured products expertise to support FIC clients.

In addition, banks are large holders of real estate, and in collaboration with our real estate colleagues, we have been able to help manage their property portfolios – both physical and investment management funds – to reduce their carbon footprint. We also actively work with our colleagues from Personal Finance, Arval and Leasing Solutions to identify, through B2B2C solutions, how banks are playing their role in the circular economy.

The banking sector is increasingly engaging with their broader stakeholders, and with our Global Banking and Global Markets colleagues, we try to help them navigate this space with their investors too. Additionally, regulation is a driving force for banks and insurance companies to disclose the implications of climate change on their balance sheets, taking into consideration both physical and transitional risks. This requires further collaboration from clients, data providers and an ecosystem of environmental experts to increase the industry’s understanding, measurement and management of climate and other societal risks.

How do you see the role of financial institutions changing in how they address sustainability challenges?

SF: Capital is being channelled towards sustainability at a rapid pace. SRI (socially responsible investment) assets under management have reached a new high of over $1tn, and ESG-focused investment attracted net inflows of over $70bn globally between April and June 2020 alone.

The commitment from financial institutions is there as Alexandra mentioned with initiatives such as the PRB, also the UN Principles for Responsible Investing (PRI), and other collaborations emerging. However to build on this the FIC sector must be adaptable – for example Covid-19 highlighted why “social” was also important alongside environmental sustainability strategies of financial institutions, and this flexibility to adapt to sustainability challenges will be important. Financial institutions must also continue to collaborate to refine the methodologies, create new indicators and push for more accessible and better-quality climate data and scenarios, so the development of open source platforms and technological innovation may be another area of evolution in the years ahead. The work on gaining consistency, measurability, comparable data and methodologies will continue. 

How do you think the FIC sustainable finance landscape will develop in the next 12 months, especially given we are in the midst of the Covid-19 pandemic and the ongoing climate crisis?

AB: We are living through extraordinary times. The Covid-19 crisis has brought particularly challenging human, social and economic consequences, the extent of which we cannot yet begin to fully comprehend. We know that climate change remains a huge challenge for both the people and the planet. I remain optimistic though, as we have seen the financial sector’s ability to react swiftly by helping governments and business survive the immediate impact of Covid-19, and develop products that offer long-term sustainable support.

The financial sector is integral to addressing these global challenges. Banks can deliver financing quickly and investors have supported numerous transactions that help individuals, businesses and governments. We are already seeing all the financial institutions sectors, including hedge funds, step up their engagement, and we only expect this to further grow. Central banks will continue to embed climate-related financial risks in their supervisory approach, which will encourage institutions to better understand the materiality of climate risks. While regulatory and policy changes will hopefully help, the broader industry is addressing these issues holistically.

As we look ahead to COP26, business and government leaders globally have the opportunity to shape our new reality, especially by supporting the transition to a net zero world that is more inclusive and sustainable. We are seeing a greater appreciation of the opportunities that this agenda presents and expect a further acceleration. Everyone has a role to play, and we at BNP Paribas are committed to continuing to support the financial institutions client base, and thank our clients for their trust in working with us.

Read more about the Banker Award wins here: